Alternative Investments
Alts are all the rage now, at least among the people trying to sell them. But every time I look into an alternative investment class and then back away from the details for a 1000-foot view, this is what I see:
Financial Lessons from Poker
Common advice about controlling spending is to track all your purchases and add them up each week or month. I believe that this is effective, but have been fuzzy on why it seems to work so well. Why can’t people just spend less without the constant reminder of how well they are doing? I got some insight on this question from, of all places, poker. For poker players there is a certain thrill to dragging in a pot of chips. The thrill is there whether it is a $1 pot or a $10 pot. The $10 pot gives a bigger thrill, but not 10 times bigger. Similarly, losing a $10 pot feels worse than losing a $1 pot, but not 10 times worse. This leads to some players playing in such a way that they maximize happiness by taking in many small pots, but losing some big ones. As long as they don’t count their dwindling chips, they can actually be happy playing this way. Counting your chips is a lot like adding up your spending at the end of the month to see what happened. You may feel good about ...
A picture is worth a thousand words!
ReplyDeleteHopefully, a few more people who get pitched alts will be more wary.
DeleteI 100% agree, when someone proposes alts I run 180 degrees the other direction
DeleteThere is a difference between performance based on price in vs price out and the subjective internal rate of return Alts use. Without reference to price & ignoring liquidity risk, IRR is not relevant to retail investors. It can be useful for LARGE institutional investors with very long horizons
ReplyDeleteI'll partially agree. IRR overstates Alt returns for all investors, but the gap to reality is smaller for large institutional investors than it is for retail investors. There is another important difference. Only the Alts shunned by large investors will get sold to retail investors. This is similar to investing in startups. If someone is trying to sell me blocks in a startup, many bigger investors have already turned it down.
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